Monday, June 27, 2011

During my trip to Washington, a Japanese company representative asked me which other countries would appoint resident ambassadors to ASEAN. Although many countries now have ambassadors who are accredited both to Indonesia and ASEAN, and others have ambassadors who are accredited only to ASEAN yet not resident in Jakarta. Right now, only the United States and Japan have ambassadors resident in Jakarta who are accredited only to ASEAN.

Having a resident ambassador to ASEAN represents a country’s commitment to work with the ASEAN institutions on a continuing basis. More importantly, that commitment is on a bilateral basis; the resident ambassador is continually available for direct communication in Jakarta with the ASEAN Secretariat and the member states’ permanent representatives to ASEAN.

On this basis, I think that eventually, most of the major economic powers will have a resident ambassador to ASEAN. The EU has had a strong presence in Jakarta already, and is aggressively negotiating free trade agreements (FTAs) with ASEAN members. Korea, Australia and India already have regional FTAs with ASEAN and will eventually follow Japan’s example.

In my opinion, however, China will not follow suit, despite showing support for ASEAN by appointing one of the first ambassadors to ASEAN (non-resident) after the signing of the Charter. Unlike the other FTA partners, China has major non-economic issues at play with ASEAN, e.g., the Spratly/Paracel Islands-South China Sea territorial dispute. Although China has been willing to discuss the dispute diplomatically with individual ASEAN members involved in the dispute, it has avoided attempts to discuss the issue on an ASEAN-wide basis. Appointing a resident ambassador to ASEAN would encourage such discussions, while having its ASEAN ambassador be resident in Beijing allows China to keep control over access and scheduling for its ASEAN mission. Thus, until the territorial dispute is resolved or (more likely) China decides that its economic interests are better served otherwise, China will not open a resident mission to ASEAN.

Monday, June 20, 2011

Stock exchanges in Malaysia, the Philippines, Singapore and Thailand agreed on a common software program to allow investors access to trading on all four exchanges. Trading is expected to begin next year. Although far from being a merger of the four exchanges, and missing the active exchanges in Indonesia and Vietnam, this is a first step to an ASEAN equities market and would mean that intra-ASEAN financial flows could one day be as active as intra-ASEAN trade in goods.

It is also impressive given the financial traumas of the not-so-distant past. During the Asian financial crisis in 1998 Malaysia unilaterally froze Singaporean trading and equity holdings in the Central Limit Order Book (CLOB) system through which Singaporeans were able to trade in Malaysian shares through indirect means. Unwinding the trades and holdings required years of politically charged negotiations between the two ASEAN members.

That Singapore and Malaysia are now willing to participate in a more direct system of cross-border equities trading shows the great improvement in ties since 1998. More importantly, it illustrates the direct effect of the ASEAN Comprehensive Investment Agreement (ACIA). Unlike its predecessor agreements, the ACIA covers portfolio investments and provides investors with protections such as investor-state dispute resolution.

However, achieving a broader ASEAN equities market will not just require bringing in Indonesia and, perhaps, Vietnam. It will require greater cooperation among the ASEAN governments to regulate cross-border equities trading in the region. In this regard the ASEAN institutions have not progressed so much since 1998. ASEAN regulators need to catch up or risk either a massive failure such as the CLOB dispute or the equally bad outcome of small but numerous regulatory failures. Whether through increased cooperation on the national level or giving more oversight authority to the ASEAN Secretariat, this needs to be done quickly.

Monday, June 13, 2011

This week I am attending the Asia-Pacific Council of American Chambers of Commerce (APCAC) Washington Doorknock along with other Amcham Asia representatives. During the event, Amcham and U.S. Chamber of Commerce representatives meet with U.S. executive and legislative branch officials to discuss issues affecting U.S. companies in the Asia Pacific. I am speaking at a Mansfield Foundation-sponsored lunch panel during the Doorknock on economic integration in Southeast Asia and the Trans-Pacific Partnership (TPP).

You can read through the rest of this blog to see my skeptical-but-supportive take on the former topic. What about the TPP, which has direct relevance to ASEAN as four ASEAN members – Brunei, Malaysia, Singapore and Vietnam – are among the TPP negotiating parties?

Well, for a start, the fact that the TPP parties have made this much progress is a positive development. The TPP began as a four-party FTA made up of Brunei-New Zealand-Chile-Singapore, covering trade in goods, trade in services, IP, ROOs, sanitary and phytosanitary measures, technical barriers to trade, government procurement, and competition policy. The TPP talks brought in Australia, Peru, Vietnam, Malaysia, and the United States and added new topics such as labor and the environment.

The stated short-term goal is to complete the broad outline of an agreement by the November APEC summit in Hawaii. The long-term goal is to create an FTA that could encompass the entire APEC membership. I think the short-term goal is achievable, but there are many obstacles to reaching the long-term goal, mainly related to the U.S. domestic political situation.

Most of the additional issues such as labor and environment were brought in at the insistence of the United States due to domestic interests. The other TPP parties do not necessarily share these sentiments, but understand that these issues need to be covered to get the agreement done.

More importantly, it is not clear whether the Obama administration could get a TPP package through Congress. U.S. FTAs previously negotiated by the Bush administration with Korea, Colombia and Panama are still stuck in the legislative approval process, and this impasse is adversely affecting the approval of a new U.S. Commerce Secretary and worker assistance funding. Neither does the Obama administration have the benefit of Trade Promotion Authority (TPA) which would allow the TPP partners to know that whatever is agreed upon in negotiations will actually be passed in the final text. Even when both houses of Congress were Democrat-controlled, Congress was reluctant to give TPA to President Obama. It is more unlikely with a Republican-controlled House, even though the Republicans are traditionally more supportive of FTAs.

Ultimately the biggest concern is whether the sheer scope and size of the TPP talks, covering a wide variety of issues and countries, will drag down the TPP process just as the WTO Doha Round has been dragged down. There is deep bi-partisan skepticism in the U.S. Congress about concluding an FTA with a “non-market economy” such as Vietnam. Indeed, Vietnam is being used as a proxy for pre-emptive discussion on China, if and when China ever joins the TPP.

Nevertheless, I hope that competition will help convince U.S. policymakers that the TPP is worth pursuing. If the United States doesn’t move forward, then the EU will, as it has with its own FTA concluded with Korea, and with its own FTA talks with Singapore and Malaysia. The EU-Singapore FTA talks should be concluded by October 2011, and the Malaysians believe that they can conclude their talks with the EU by early 2012. The EU has stated that they are willing to start negotiations with Vietnam, Thailand and Indonesia in the near future.

I think this should motivate the TPP negotiators such that we will have a broad agreement on the TPP by APEC Hawaii, but work will necessarily have to continue beyond into the next presidential term due to the electoral schedule and U.S. domestic political concerns. That is not necessarily a bad thing, as the TPP could bring in the entire Asia-Pacific. More importantly to the United States, it’s the only game in town at the moment. Either way, more time to get things right and convince the skeptics is a worthwhile investment.

Monday, June 6, 2011

In my law school class on the AEC, I often note that the ASEAN Industrial Cooperation (AICO) scheme is the paradigm for economic integration in Southeast Asia. In its birth, life and impending death, AICO serves as an example of the best and worst of how ASEAN economic cooperation works.

AICO was created in 1996 to encourage cross border investment and trade within ASEAN, serving as an early harvest of the ASEAN Free Trade Area (AFTA, which in 2010 became the ASEAN Trade in Goods Agreement, or ATIGA). Companies operating in 2 or more ASEAN members could qualify for the early application of the 0-5% AFTA rates for their production inputs and finished goods if they could demonstrate that the proposal involved resource sharing/pooling and/or industrial complementation. The inputs and outputs also had to have 40% ASEAN content. Almost all (89 of 129) approved AICO projects involved the automotive industry, as the Japanese companies used the AICO scheme to enjoy major cost savings from the reduced import duties.

The major aspect of AICO is that it created the first ASEAN-specific legal obligation (as opposed to an obligation owed by an ASEAN member state), a major step in the development of the AEC. After approval of the AICO application, the ASEAN Secretariat would issue an AICO certificate of eligibility which would allow the company to enter goods from the other ASEAN member using the reduced AFTA rates. The certificate thus created a set of rights and expectations between the company and the ASEAN Secretariat.

Unfortunately, in the days before the ASEAN Charter (and perhaps even now with the Charter in place) a company had no legal recourse should difficulties have resulted with the issuance of the AICO certificate. Fortunately, the ASEAN Secretariat was efficient in the administration of AICO and such disputes did not occur. Unfortunately, the ASEAN members were not as efficient; I worked on a four-way AICO application that took 2 years to complete, despite the AICO agreement’s stipulated 60 day deadline for processing applications. That was because each of the 4 ASEAN members insisted that the intra-ASEAN trade result in a net surplus to its own benefit, which was mathematically impossible (we had to make some difficult assumptions in each country). Despite these hiccups, AICO was quite successful and resulted in the high level of regional integration prevalent in the ASEAN automotive industry today.

With the full implementation of AFTA/ATIGA in 2010, the tariff reductions reached their final level, such that the reduced tariff rates under AICO were equivalent to the AFTA/ATIGA rate., or in some cases a little higher. This meant that AICO offered no practical advantage over using ATIGA (with the exception of the AFTA/ATIGA rates applicable to Cambodia, Laos, Myanmar and Vietnam, which were allowed a longer period to implement the final ATIGA rates, although there are only 3 AICO projects involving Vietnam).

Thus, one would think that AICO would have had no relevance after 2010. However, Thailand continued to apply AICO, particularly for the importation of complete knocked-down (CKD) automobiles from other ASEAN members. Importers of CKD vehicles into Thailand would use AICO instead of ATIGA (due to the more complicated customs valuation methodology, I am told), even in instances where the AICO rate was higher than the ATIGA rate. Furthermore, Thailand interpreted its customs law and AICO as establishing a maximum quantity for importations under AICO, based on the companies’ original AICO applications. A company importing more than this stipulated quantity would face application of the full MFN rate to the imported excess quantity. This arguably is inconsistent with the requirements of ATIGA that no import quotas be imposed on intra-ASEAN trade in goods.

Thankfully, after several months of internal pressure and ASEAN-style consensus building, Thailand agreed with other ASEAN members to terminate AICO and allow it to become superseded by ATIGA, effective later this year. That it did so without resort to the ASEAN Enhanced Dispute Mechanism or other litigation demonstrates that the “ASEAN way of consensus” can indeed work in the administration of the AEC. In this way AICO helped develop the AEC even at the end of its useful lifespan.

This is why I spend an entire class session of my AEC course on AICO. To me, it is the equivalent of Cassis de Dijon or Marbury v. Madison; it demonstrates how ASEAN can administer its single market, the AEC, in a manner unique to its own institutional environment. I hope that ASEAN can continue to apply the lessons learned from the AICO experience.

Not only is this correct, but several other intra-ASEAN disputes have gone to extra-ASEAN dispute fora. This is expressly allowed by Article 28 of the ASEAN Charter (which Indonesia opposed during the drafting process). Singapore and Malaysia, and Indonesia and Malaysia, have gone to the ICJ over disputed islands. Singapore initiated the first use of the WTO dispute resolution process against Malaysia, and there currently is a WTO dispute between the Philippines and Thailand.

In fact, even in a non-adversarial context, ASEAN members resort to extra-ASEAN sources of law. For example, ASEAN members have often been reluctant to conduct cross-border customs inspections to verify whether goods qualify for the ASEAN Trade in Goods Agreement (ATIGA), despite the fact that ATIGA expressly authorizes such inspections. For inspection of automotive industry exporters, ASEAN members have been using a 1958 UN agreement on the automotive industry as legal justification for such inspections. The agreement allows importing countries to confirm whether the products have been produced in the claimed country of manufacture. During such inspections, ASEAN authorities have also been checking the cost manufacturing statements and other data for compliance with ATIGA.

Furthermore, when Canada invokes international arbitration against the United States on countervailing duties on softwood lumber, Mexico uses WTO dispute settlement against U.S. antidumping measures on oil pipe, or Argentina does the same against Brazilian antidumping measures on various products, the credibility of NAFTA or Mercosur is not questioned. So why does ASEAN’s credibility get questioned when it resorts to extra-ASEAN legal fora?

The difference is comes from history and expectations. The NAFTA and Mercosur countries are relatively well-settled in their sovereignty and legal foundations. ASEAN is still quite young, with most of its members enjoying recently-won sovereignty in historical terms. In this context, the use of extra-ASEAN legal sources is understandable.

The bigger question is whether ASEAN can apply the experience from its use of the ICJ, WTO and other sources of law to the implementation of an ASEAN-specific body of law and dispute resolution. Extra-ASEAN law can help establish the legal foundations of the AEC, but without an indigenous source of law and order, investors will either be reluctant to increase their stake in the AEC or demand a higher return on investments. Not every dispute needs to go to the UN, just like not every dispute in the U.S. needs to go to the U.S. Supreme Court or requires congressional intervention. ASEAN needs to adapt the extra-ASEAN norms of law and order for its own needs and uses.

About Me

I am an American international trade lawyer and partner in the trade boutique firm Appleton Luff. I also teach the first course on the law and policy of the ASEAN Economic Community, at National University of Singapore law school and have served as an adviser to the ASEAN Secretariat and various ASEAN government ministries.

My Upcoming ASEAN Events

US-Malaysia-ASEAN Outlooks on Malaysia as ASEAN Chair and Realization of the ASEAN Economic Community and Regional Comprehensive Economic Partnership in 2015, American University ASEAN Studies Center, Washington, Dec. 1, 2014